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28 September 2017

Europe's gray market 

Europe’s greatest long-term challenge is not economic but, rather, demographic. By 2060, some 28% of the EU’s population will be 65 or over, compared to just 18% today.

Already, Europe faces a staggering €2 trillion annual shortfall in pension savings. As the size of the retirement-age population continues to expand and individuals live longer, that gap will only grow – forcing governments to take broadly unpopular measures such as raising the retirement age, reducing state pensions and increasing mandatory individual contributions. 

Moving forward, retirees will therefore be able to rely less on such government programmes, placing more importance on the other two pillars of the pension system: corporate retirement savings (based on defined contributions by employers and employees) and privately funded accounts, including individual savings plans and insurance schemes.

With a view towards strengthening that third pillar, the European Commission recently proposed an initiative known as the “Pan-European Personal Pension Product,” or PEPP. 

At first glance, the PEPP sounds pretty commonsensical: as a pan-European product, savers will have greater choice, selecting from options offered by a broad range of providers, including asset managers, insurance companies, banks and occupational pension funds. And by making personal pensions “portable,” individuals will be able to count on a stable scheme when moving among EU member states. 

That’s all well and good – but it’s worth noting that barely one-quarter of working-age Europeans subscribe to any personal pension product and that signing up to a PEPP would remain entirely voluntary. 

Making participation in such private pension schemes mandatory – as is the case in Denmark for part of the domestic workforce – is simply not on the table. Tax treatment is therefore the key to the success of the proposed initiative, and one of the thorniest issues under discussion. 

PEPPs clearly won’t work if such pan-European products are taxed at a higher level than domestic options – which is why the EC has recommended that member states grant the same tax treatment to PEPPs as they do to comparable national products. 

The Commission does not have the authority to mandate such tax treatment, however, and it remains to be seen if governments will prove willing to subordinate their more narrow national interests to Europe’s greater good. 

Consequently, it is unclear how much impact the PEPP would have if it’s ultimately authorized by the European Insurance and Occupational Pensions Authority. 

The promise of portability would hold special appeal for mobile European professionals; PEPPs could also prove popular among the self-employed. Likewise, those living in markets where personal-pension options are currently limited – including much of eastern Europe – would benefit from access to greater choice and the PEPPs quality seal, supported by standardized key information documents that would allow savers to compare offerings on a like-for-like basis. 

The European asset management industry would be another obvious beneficiary of this proposed cross-border product that encourages pooled solutions, leading to economies of scale. 

Indeed, the Commission estimates that the EU’s current €700 billion in personal-pensions savings could reach €2.1 trillion by 2030, including some €700 billion in PEPPs – making the currently fragmented and undersized market a source of increased long-term investment in the real economy.